Subsidies: Throwing a wrench in the gears of economy | Business

LAHORE: All industrial activity would stop if the government continued to reward inefficiency through subsidies and protective duties.
The basic textile sector is protected through regulatory duties and export subsidies, while cement, sugar, and steel sectors are also beneficiaries of this policy.
For instance, sugar, the elitist industry of the country, lacking efficiency to produce at globally competitive rates, continues to be bailed out through export subsidy every time it overproduces. It is worth noting that sugar industry is predominantly owned by the political elite on both sides of the political divide.
The local industry in the country sells sugar at around Rs18 per kg higher than the global sugar rates, overcharging domestic consumers to the tune of over Rs90 billion annually. The local consumption of sugar according to millers is 5.1 million ton per annum. When it exports more than the local requirements it demands subsidy ranging from Rs10 per kg to Rs13 per kg.
This year the sugar sector is asking for up to Rs18 per kg on 1.5 million surplus sugar available in the country.
This in other words means that it is demanding Rs27 billion in subsidies.
It would be no surprise if the government accedes to it.
In fact the Sindh government has offered to finance 50 percent of this subsidy for Sindh based sugar mills.
The other provinces would follow the suit if the federal government agrees to the proposal.
It is ironical that none of the provincial governments offered subsidy to other ailing industries like textile or leather.
They have soft corner towards sugar mills because they are mostly owned by their political colleagues.
Sugarcane crop has encroached upon the land used for cotton and majority of sugarcane crushing capacities have shifted to south Punjab which traditionally is the largest producer of cotton in the country.
As the cotton sowing area declined so did the cotton production.
Steel is another sector that is solely operating on protective duties for the last three decades with the result that its inefficiencies are financed by the consumers who have no choice but to buy expensive steel products because of this duty protection.
Steel, it may be recalled, is known as the mother of all industries because it supplies the raw material for engineering industry that produce industrial machinery. Because of this protection Pakistan only produces low value added steel products while most of the industrial machinery is imported.
By protecting local cotton yarn we are making the basic raw material of the value-added textile sector more expensive.
The result is that the spinning and weaving industry that is already under stress is making the apparel industry suffer because of high yarn prices they charge from them.
The government should realise the protective duties on basic materials are a kind of subsidy for local producers of that basic input.
The local producers factor in the duty impact on that raw material and sell it at slightly lower than imported input. A subsidy free regime would take Pakistan to new heights while subsidies would ultimately turn the country in to a trading economy.

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November 20, 2017 at 09:47AM